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Hog Heaven

Why Harley-Davidson’s Ambitious Strategy Of Global Sourcing is Working

MOTORCYCLE MAMA MIA: American-made Harley-Davidson bikes are popular all over the world.

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Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom.

The US motorcycle maker is going abroad because it is being punished by the same trade rules it once championed.

Harley-Davidson has been expanding globally though not always successfully.

Like so many others, Harley-Davidson has found itself inside the Trump vortex, the social phenomenon in which news becomes a swirl of entertainment, opinion, and super-heated argument.

The tempest began in February, just days after Donald Trump’s Jan. 20 inauguration and a Washington Post report that the new president would make as his first official trip a visit to Harley-Davidson’s production plant in Menomonee Falls, Wisconsin. It seemed a natural—a flag-waving brand that says it “has fulfilled dreams of personal freedom” since 1903 and a president who’s hat says he’ll Make America Great Again. Except that Harley quickly denied it, saying, “We don’t have, nor did we have, a scheduled visit from the president this week at any of our facilities.”

That left then-White House spokesman Sean Spicer to tell reporters, “Look, it was easier for the executives to come here, considering the week and all of the activity that’s been going on. No decision had been made about or announced as to what we were doing.”

None of the explanations deterred anti-Trump protestors, who claimed victory and raged against the machine-maker throughout Wisconsin. A scrawny gathering of 100 turned up in Milwaukee, World HQ for Harley-Davidson, to declare themselves part of a “resistance.”

Trump never showed up in Wisconsin, but a few weeks later he hosted Harley-Davidson execs and factory workers at the White House. It was a great look for the newly minted president: leather-clad bikers roaring out of the industrial heartland as Trump stepped out of the West Wing to greet them. In the press conference that followed, the president was ebullient. He thanked Wisconsinites for their support on Election Day, and thanked Harley-Davidson “for building things in America.”

In fact, the company has been expanding globally though not always successfully—a fact that Trump’s (and the company’s) critics were only too eager to point out. Two foreign acquisitions had puttered and clanged to failure within a few years, victims either of the Great Recession or lousy investment targets or both. Similarly, the 2014 debut of the Street, Harley-Davidson’s first new lightweight bike since the 1970s, was supposed to be huge for the company. But its foreign-made parts enraged the Buy America demographic, including union leaders and the sorts of voters likely to back candidate Trump. Global logistics experts joined in, pointing out that Harley’s move to offshore production came at the moment when major U.S. companies had decided that onshoring was the wiser bet. And then the foreign parts simply failed to appear on time at the company’s Kansas City factory. That breakdown delayed delivery of the Street motorcycles to Harley-Davidson’s U.S. dealers, and so nearly everyone in the world felt a reason to hate the company that nearly everybody loves. “We’re going through a learning curve,” the company’s CFO admitted during an investor call at the time.

The recycling of old bad news got a second life—a re-recycling of cycling news—just a few weeks after Trump’s grip-and-grin with Harley representatives. Speaking to a Feb. 28 joint session of Congress, Trump told Americans that Milwaukee-based Harley-Davidson is getting ripped off in the global marketplace.

“They told me—without even complaining because they have been mistreated for so long that they have become used to it—that it is very hard to do business with other countries because they tax our goods at such a high rate,” Trump remarked. “They said that in one case another country taxed their motorcycles at 100 percent.

“They weren’t even asking for change,” the president added of the motorcycle maker. “But I am. I believe strongly in free trade, but it also has to be fair trade.”

In fact, Harley-Davidson isn’t complaining because the company may have figured out the global trade game. The company’s ambitious strategy of global sourcing is working. And now Harley-Davidson projects international sales will account for half of its revenue by 2027.

To meet that goal will require the balance of a biker at high speed on the open highway, maybe standing on the saddle of his iron horse with his arms outstretched, a 70-mph zephyr blowing so hard through his Viking-style beard that the thing (the beard) has become a kind of flaming reddish pennant trailing behind him. Harley will have to do that—remain a boldly American brand even while going aggressively global—because as company insiders like to say, Harley-Davidson doesn’t sell transportation. It sells a lifestyle—“Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom,” state the concern’s press releases.

But you have to be in business to sell anything.

YOU COULD CALL THE COMPANY’S 2027 GOAL the apogee of a 10-year plan to go global except that Harley has been a global company since its birth in 1903. The bikes have not merely followed but often led U.S. involvement in foreign wars. When the U.S. entered the First World War, the company sold almost half of its production to the U.S. government for use in Europe. You could say that war ended not with a rifle crack or even with the signing of the armistice but with the guttural roar of the first American into Germany at war’s end—Roy Holtz of Chippewa Falls, Wisconsin, in the saddle of a Harley-Davidson.

The company sold 90,000 bikes to the U.S. government during the Second World War, a third of which went directly to the Soviet Union. Back home, a couple of returning U.S. war veterans bought Harleys, put on leathers and created a biker gang that went global, the Hell’s Angels. Today, Hells Angels Motorcycle Corp., which claims more than 100 chapters in 29 countries, still prefers the Harley brand.

War is hell, of course, but the bike’s brush with violence actually burnished its global brand. High points in postwar global sales track nicely with the bike’s leading roles under the kiesters of such Hollywood anti-hero stars as Marlon Brando (in 1953’s The Wild One) and Dennis Hopper and Peter Fonda (in 1969’s Easy Rider). The brand’s association with rebellion and personal freedom was likely boosted when the ultimate square, Vice President Spiro Agnew, denounced Easy Rider as “playing right into the hands of the drug culture.”

But not even pop-culture celebrity could save the company from the rigors of the global economy. In the late 1970s and early 1980s, Harley-Davidson suddenly seemed a symptom of Rust Belt decline. Its oil-spitting, breakdown-prone motorcycles hadn’t kept up with remarkable industrial developments in former American enemies—now allies—Germany and especially Japan. Kawasaki, Suzuki, Honda and Yamaha bikes showed up in rising numbers on the docks of New York and New Jersey, Portland, Seattle, Los Angeles, Long Beach and Oakland, the very platforms from which Harley-Davidson had conquered the world.

The story of how the Reagan Administration rescued Harley from almost certain death represents something about the actual rather than ideal role of government trade policy—as well as a departure from the company’s reputation for rugged individualism. President Ronald Reagan talked about free trade, but his administration accepted the Rooseveltian concept of voluntary export restraints in order to save precisely one company: Harley-Davidson. There was, of course, nothing “voluntary” about the export restraints: in exchange for continued access to the U.S. market, Japanese manufacturers agreed to reduce sales of their motorcycles in the U.S., accepted nearly 50 percent tariffs on their bikes, and even helped apply the defibrillators to Harley-Davidson, teaching the benighted manufacturer to build a world-class bike.

HARLEY-DAVIDSON LEARNED FROM JAPAN. It has cultivated the tough-guy American image even as it became globally nimble. So when President Trump told Congress and America the company’s officials suffer a kind of industrial Stockholm Syndrome—that they can’t even see their own victimization at the hands of foreign powers—the president’s core constituents leapt for rage-fueled joy.

“Trump didn’t mention it, but India is not the only country that discourages Harley’s international sales,” wrote Fortune commentator Alan Wolff. “Thailand imposes 60 percent tariffs and China 30 percent, levels not seen in the U.S. since the 1930s following the infamous Smoot-Hawley Tariff Act that raised tariffs to marked highs.”

And so the Trump vortex spun faster. Others familiar with the company’s Reagan-era history accused Harley-Davidson of hypocrisy. “The quintessential American motorcycle maker is going abroad because it is being punished by the same sort of trade rules it once championed,” said one. Another pointed out that Trump had already hurt Harley. “The high tariffs faced by Harley when trying to sell its bikes overseas would have been substantially removed by the Trans-Pacific Partnership, which Trump squashed his first days in office,” wrote Forbes commentator David Kiley. “In Vietnam, for example, Harley faces a 74 percent tax. It would have been zero if the U.S. signed on to TPP. Indeed, Harley’s CEO and chief lobbyist publicly advocated for TPP last year.”

Harley wasn’t complaining about tariffs because it was already working around them.

“Duties and tariffs levied in foreign countries can make the product uncompetitively priced for local markets,” said Brian Smith, who was, until retiring in 2010, director of Logistics and Indirect Procurement at Harley-Davidson. “One way we mitigate that problem is through postponement strategies.

“For example, we ship the product in component kits and delay final assembly until they reach Brazil. Doing final assembly in Brazil results in lower import duties. Using this strategy for Brazil reduces duties by nearly 85 percent.”

In the face of India’s 100 percent tariff on Harleys, the company in 2011 opened a local assembly plant sourcing U.S. parts. Indeed, India plays a role in manufacturing H-D’s less-expensive bikes for much of the global market. The company will do the same in Thailand. That plant, in Rayong province, southeast of Bangkok, will open in 2018, and like the Indian plant will reportedly assemble U.S.-built parts. It will also pave the road for Harley’s tariff-free entry into the 10 members of the Association of Southeast Asian Nations.

As industry expert Ryan Felton said, “The 100 percent tariff sounds drastic, but there’s far more to it than meets the eye.”

Harley-Davidson has been less successful in attempting another route to the global market: acquisition. In 2008, just before the recession, it bought Italian sport bike maker MV Augusta for $109 million. Critics called it a match made in hell, an attempt to merge the unmergeable lighter and faster sport-bike category with the beefy cruisers for which Harley is famous. They were apparently right. When new CEO Keith Wandell arrived in 2009, he ordered staff to dump the MV Augusta. They did, selling it back to Claudio Castiglioni, its former owner—for nothing. The following year, Wandell shut down Buell, a Wisconsin-based sport-bike maker Harley had acquired in 2006. Wandell said the sport-bike properties blurred Harley’s American-made, man-in-black, big-engine image and faced brutal competitors in the global market.

But Wandell left the company—beefier, more global and more profitable—in 2015. His successor, Matt Levatich, the bike-riding exec who met with Trump in February, is ready to try global acquisitions again. This time it’s Ducati, an Italian bike maker that was once only about super-fast sport-bikes but has recently gone head-to-head with Harley. Ducati’s move into heavy cruisers was controversial. “Purists will be pissed, Ducati will probably sell a ton of these, and old rich guys will finally be able to solve that mid-life crisis dilemma of choosing between a sexy import performance brand and, well, a Harley,” observed an industry expert.

Harley would like to resolve that uncomfortable choice by owning both brands, announcing its bid for the company, valued at $1.5 billion. Harley isn’t saying why it’s ready to take on Ducati and did not respond to requests for comment on the deal. Access to foreign markets? Ducati’s cutting-edge technologies? Short-term memory loss vis-à-vis Buell and MV Augusta?

The move has many perplexed. “Harley has chosen to remain fairly single-minded since the recession in its pursuit of its big-bore bikes,” said investor website Motley Fool. “A Ducati purchase would amount to a significant divergence from that path.”

“Divergence from the path?” Please. The Ducati deal may fail, but fear of failure ain’t part of the Harley-Davidson brand. Reflecting on second quarter earnings per share that down throttled 4.5 percent to $1.48 compared to $1.55 in the same quarter the previous year, Levatich on July 18 remained upbeat. “Our long-term strategy, focused on building the next generation of Harley- Davidson riders, is our true north. Our new product investment is one pillar of our long-term strategy to build riders globally and we are energized by the strength of our model year 2018 motorcycles coming later this summer.” If you’re a gambler, put your money on the manufacturer whose iconic American motorcycle will one day be chiseled into a granite cliff in South Dakota.